Gifting property or assets to family members may seem like a simple way to reduce Inheritance Tax, but if you continue to enjoy the benefits of what you’ve given away, HMRC may treat it as a gift with reservation of benefit. Understanding the rules is crucial. Otherwise, what you intended as a tax-saving strategy could backfire.
Real-Life Scenarios
Scenario 1: The Family Home
Jane transferred her main residence to her two children but continued living in it rent-free. She assumed that legally giving the property removed it from her estate for Inheritance Tax purposes. HMRC disagreed: because Jane retained the benefit of living there without paying a market rent, this was treated as a gift with reservation of benefit. Had she been charged a fair rent, she could have avoided the reservation and reduced her Inheritance Tax exposure.
Scenario 2: Investment Property
Michael gifted a buy-to-let property to his daughter but continued collecting the rental income. Despite transferring ownership, HMRC considered this a gift with reservation of benefit, meaning the property remained part of Michael’s estate for Inheritance Tax purposes. A proper structure, such as transferring ownership and redirecting income to the new owner, would have prevented the reservation.
Scenario 3: Business Shares
Sara transferred shares in her family business to her son but continued receiving dividends. The retention of financial benefit created a gift with reservation of benefit, which could have increased her Inheritance Tax bill if she passed away within seven years. Restructuring the dividend arrangements would have avoided this risk.
Common Pitfalls
- Continuing to use the asset personally – Even informal arrangements can trigger a reservation.
- Assuming legal transfer automatically removes tax exposure – Ownership alone is not enough.
- Failing to consider ongoing benefits – Rental income, dividends, or even rights to live in a property count.
Planning Around a Gift with Reservation of Benefit
Mitigating a gift with reservation of benefit often requires careful planning:
- Charging a market rent if you continue to live in a gifted property
- Transferring income streams along with ownership to remove personal benefit
- Consulting professional advisers to ensure arrangements meet HMRC rules
These steps can convert a gift that would otherwise be “reserved” into a genuine tax-saving transfer.
Why Professional Guidance Matters
Without expert advice, it’s easy to unintentionally create a gift with reservation of benefit, leaving your estate exposed to additional Inheritance Tax — which is why working with a qualified professional, such as an experienced accountant, can make a significant difference.
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Conclusion
A gift with reservation of benefit can catch out even experienced property owners. Proper planning ensures your gifts achieve their intended purpose, protects your family from unexpected tax bills, and keeps your estate compliant with HMRC rules.
If you’re considering gifting property or other assets, reviewing your plans with a professional is essential. Understanding the rules around gift with reservation of benefit today can save your family thousands tomorrow.
